Emissions crisis underscores shift to low carbon future

23/05/2016

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Nick Anderson, Portfolio Manager within Henderson’s global equity sustainable investment team, discusses the latest developments in the diesel emissions crisis. He explains why the crisis could be symptomatic of the world adjusting to a lower carbon future.

The emissions crisis that started at Volkswagen (VW) late last year continues to rumble on; Mitsubishi admitted the falsification of fuel efficiency test data in April, and a number of other high profile carmakers have been implicated in emission-fixing activities. Investors are not only asking what went wrong at individual companies, but are beginning to question whether the crisis is the manifestation of secular pressures in the sector: is the internal combustion engine facing obsolescence? Change is already afoot: just as the UK government led the way in phasing out incandescent lightbulbs in Europe, the Dutch parliament is considering banning the sale of petrol and diesel cars from 2025.

What went wrong at VW?

For VW, the emissions scandal partly originated from a flawed strategy and a troubled corporate culture. Developed under Martin Winterkorn’s tenure as VW’s chief executive, VW’s corporate mission was to become the world's leading automaker by 2018, “both economically and ecologically”. Rather than “ecologically” being an unfortunate afterthought, VW’s plan for world domination had to incorporate producing low emission vehicles: it is impossible to be the world’s leading auto producer without a major presence in the North American mass market, which demands high standards for NOx (oxides of nitrogen) emissions.

Ultimately, the twin aims to produce low emission vehicles while growing profitability proved catastrophically incompatible for VW. The group’s engineers struggled to find a solution that could satisfy the regulators and produce a mass-market affordable product without investing hundreds of millions of dollars in development spending. Only through the deployment of the infamous ‘defeat device’ could the engineers meet the demands of their superiors while appearing to comply with emissions regulations.

Company culture really counts

Eleven million vehicles later, not only is it clear that VW’s strategy was critically flawed, but also serious questions have been raised about the group's culture. After the financial crisis VW shares seemed to offer an attractive investment opportunity. The company had been one of the few auto manufacturers to invest throughout the downturn, building out modular production facilities for its range of leading brands. VW appeared to be on the verge of a significant improvement in profitability and cash flow. But, even then, something was amiss with the group’s culture.

VW was reported to have an overbearing and dominant management style, and employees felt uncomfortable questioning the group’s strategy, let alone whistleblowing on employee misdemeanours. The breakdown of trust between the company, its customers, employees, and investors will take many years to rebuild.

Tesla 3 presages fundamental industry change

The events at VW highlight the challenges facing incumbent autos companies as we move towards a global economy that is less dependent on fossil fuels for its energy needs. Free of heritage and huge investments in existing technology, and with an ability to act and innovate with imagination, new players can thrive in a rapidly changing world.

The launch of Tesla’s Model 3 heralds the start of a fundamental change in the auto industry. Tesla’s electric vehicle (EV) boasts all the latest safety features, with a range of 215 miles, and 0-60mph in under six seconds. Importantly, the starting price will be US$35,000 (before taking any account of government incentives), in line with the average price for new cars in the US. Reservations for the new model soared upon its release in early April, topping 325,000 in the first week alone. Ultimately, a combination of cost and utility will drive the penetration of electric vehicles – and these are moving in the right direction now. Although EVs account for a tiny proportion of new car sales today, once a tipping point is reached expect adoption to be rapid.

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Janus Henderson Institutional Global Responsible Managed Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.

Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.

This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.

The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.

The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.

Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.

Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.

When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.

Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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